Monetary Policy Transmission Through Adjustable-Rate Mortgages in the Euro Area

This paper studies the role of adjustable-rate mortgages (ARMs) in monetary policy transmission within the Euro Area. Conventional wisdom holds that ARMs are relevant per se. This study finds that the presence of liquidity-constrained households strongly influences their impact. Using Euro Area survey data, I document that transmission is stronger in countries that exhibit both high ARM shares and sizable shares of liquidity-constrained households. To interpret this finding, I develop a heterogeneous-agent model featuring: (i) heterogeneity in marginal propensities to consume (MPCs), (ii) agents making both housing and mortgage choices, and (iii) a fraction of households with ARMs. In the model, MPCs determine the extent to which changes in mortgage payments translate into changes in consumption, making ARMs an important transmission vehicle only when paired with high MPCs. These results highlight that accounting for household heterogeneity in MPCs is essential to assess the strength of transmission through ARMs.